The slowing global economy has greatly impacted businesses across sectors and industries. However, consumer staples companies are generally well-positioned to navigate near-term economic turbulence whipped up by high inflation, rising interest rates, and a slowdown in consumer spending.
While these challenges could stymie their operating performance in 2023, Morningstar’s ‘Global 2023 Outlook’ report assures “the consumer staples companies within our portfolio have ample headroom [and] should generally be able to pass through most cost increases and exercise capital management in a balanced manner.”
The following consumer staples names should enjoy steady sailing through the challenging macroeconomic headwinds by responding to inflation with further pricing increases, which will be the primary driver of revenue growth in 2023.
Ingredion (INGR) is a global company that produces ingredients for various industries such as food, beverage, paper, and personal care. Sweeteners, including syrups, maltodextrins, dextrose, and polyols, make up around 35% of sales while starches, used for food and industrial use, account for around 45% of sales. The majority of its sales come from outside the U.S., especially from developing markets such as Latin America and Asia-Pacific.
The company’s products fall into two main categories: “core” and “specialty” ingredients. “The company's long-term goal is for specialty ingredients to generate 38% of sales (from 30% currently) and nearly 60% of profits (from 50% now),” says a Morningstar equity report, noting that the firm has been investing aggressively in specialty ingredients, starch-based texturizers, plant-based proteins used in alternative meat products, and specialty sweeteners such as stevia and allulose.
Since specialty ingredients are value-added and require proprietary formulations, “they typically command at least twice the gross margins and double the price of core ingredients,” says Morningstar strategist, Seth Goldstein, who puts the stock’s fair value at US$120, stressing that specialty ingredients volume will continue to proportionately displace core volume.
Core ingredients are typically commodity-grade, providing no pricing power for Ingredion, and are projected to grow at a low-single-digit rate, compared to mid-to-high single-digit growth for specialty ingredients volumes, says Goldstein.
While the company lacks cost advantage, its posses two moat sources in intangible assets and switching costs, particularly in its specialty ingredients business.
Leading warehouse club, Costco (COST) has 838 stores worldwide where customers pay to shop for a limited selection of low-priced products. The majority of its sales come from the U.S. (73%) and Canada (14%). It primarily targets individual shoppers, but almost 20% of its customers hold business memberships. Food and sundries account for 39% of sales while non-food merchandise (27%), ancillary businesses such as fuel and pharmacy (21%), and fresh food (13%) make up the rest. Around 7% of Costco's global sales come from e-commerce.
“With a besotted member base, low-frills warehouses, and growth opportunities at home and abroad, we expect Costco’s durable competitive advantages to lead to consistent, strong performance despite retail’s upheaval,” says a Morningstar equity report.
While competition is intensifying, Costco’s cost leverage, procurement strength, and top-class store efficiency should allow it to keep traffic high.
“With ample opportunity to expand globally, we expect Costco to post consistently strong returns even as it grows,’ says Morningstar equity analyst Zain Akbari, who recently lifted the stock’s fair value to US$476 from US$454, incorporating strong fourth-quarter earnings.
The company’s membership renewal rates in the U.S. and Canada have remained at roughly 90%, defying strong headwinds including a financial crisis, the expansion of Amazon’s Prime offering, a credit card provider switch, fee increases, and the COVID-19 outbreak.
The retail sector’s lack of switching costs and intense competition hamper the development of sustainable competitive advantages. However, Costco has achieved a wide economic moat based on its intangible assets and cost advantage, Akbari adds.
Constellation Brands (STZ) is the leading supplier of multiple types of alcohol in the United States. Its brand portfolio includes such popular Mexican beers as Corona and Modelo, which they acquired from AB InBev with exclusive and permanent rights for the U.S. market. Constellation imports most of its products from abroad and distributes them through independent wholesalers. The company also owns a 36% stake in Canopy Growth, a major cannabis company.
While Constellation Brands historically operated as a winery and distillery, the firm has now grown into one of the most stellar brewers across the globe. After acquiring U.S. rights to Corona and Modelo, “we see the firm’s overall Mexican beer portfolio as auspiciously situated at the confluence of unwavering secular and demographic trends,” says Morningstar equity analyst Jaime Katz, who recently upped the stock’s fair value to US$274 from US$267, incorporating second-quarter results that included sales growth of 15% for beer and 1% for wine and spirits, outperforming estimates.
With an enviable growth profile and best-of-breed margins, the beer business can thrive even amid an evolving industry landscape, says Katz.
The firm benefits from the continued rise of political, social, and cultural clout of the Hispanic population in the U.S., enhancing Constellation’s intangible assets. “The firm is not resting on its laurels, however, as it continues to expand its addressable market by widening the gamut of categories in which it competes,” argues Katz.
The firm’s wide moat is built on its stable of brands that, together with geographical, political, and demographic factors, “create a sublime set of intangible assets,” she adds.
